The severe financial punishment to Russia can put in check the world hegemony of the dollar

The US is using all the economic power at its disposal to isolate Russia. The dominant role of the dollar in the global financial system makes these measures enormously powerful. However, this may also have a possible effect boomerang: accelerate efforts by Washington’s geopolitical rivals to avoid the greenback looking for other options and reducing its international currency reserves.

The financial punishment of Russia carries the danger of becoming the spigot that gives way to this dynamic. The case of Moscow can serve so that China, the other great world power right now in conflict with the US, ends up encouraging itself to form a world alternative to the dollar. The exclusion of some Russian banks from the interbank payment system SWIFT may end up being proof of it. The Russians are asserting their homeland system, the SPFS (Financial Message Transfer System). However, its scope is quite local. That is why the hypothesis gains strength that the country turns to the Chinese system, the CIPS.

Although resorting to this route would reduce the need for dollars (Russia-China trade can be settled in yuan), as long as 40% of the world’s international payments are in dollars, the CIPS – whose share is 3% – cannot be a global alternative. That’s where the scene comes in. yuan digital. Although it is currently designed primarily for domestic retail payments, the token it is primed for cross-border use, giving it great potential to hurt the dollar.

If a Chinese business or individual was threatened with being unable to send money abroad because SWIFT did not pass on its instructions, an intermediary in a friendly country could always be persuaded to accept the digital yuan and forward a payment in stablecoins in dollars to the counterpart of the Chinese buyer abroad. The broker does not face any risk because he is dealing with sovereign moneybacked by the taxpayers of the world’s second largest economy.

SWIFT will never see the transaction and no Western bank may be needed to move funds across borders. Even if the US bans companies from stablecoins doing business with Chinese residents, you may not prevent third-country entities from purchasing tokens in dollars on a cryptocurrency exchange to pay US-regulated companies. The sphere of US economic dominance could shrink, not in a year or two, but perhaps in a decade or more.

“Is something long termso nothing immediate, let alone two or three years from now, but if what we are seeing is a demonstration of the power of economic and financial force, the logical response if there is a risk of being on the receiving end is to see what it can be done to immunize yourself, “adds Steven Englander, CEO of Standard Chartered Bank. The fact that the US has just decided on the digital dollar will also play a more than important role here.

Zoltan Pozsar (Credit Suisse): “Wars tend to become momentous junctures for world currencies”

Credit Suisse interest rate strategist Zoltan Pozsar echoes these risks for the dollar. In his intervention in a podcast of Bloomberg Pozsar has pointed out that wars tend to become momentous junctures for world currencies, and with Russia’s loss of access to its foreign exchange reserves, a message has been sent to all countries that they cannot count on these money reserves to actually be theirs in the event of a stress. As such, it may make less and less sense for global reserve managers to hold onto dollars for safety, given that they could be taken from them just when they are most needed. A lesson that, before Russia, the Taliban learned in Afghanistan a few months ago.

Pozsar argues that situations like these can encourage central banks to diversify away from the dollar, or to try to re-anchor their currencies in assets less susceptible to the influence of the US or European governments. In this way, the recent tensions could give way to a new monetary order in which countries are much less interconnected through international bank accounts and reserves.

Russia itself has reduced its reserves of dollar-denominated assets before the invasion of Ukraine. The Russian central bank said in January that the ‘greenback’ represented about 16% of its foreign exchange and gold reserves in the second quarter of 2021, only slightly more than the Chinese yuan, at 13%. Although this is an unusually low figure, the share of the US currency in international reserves of the world for which a breakdown is available it’s been declining for a while. In the third quarter of 2021 it was 59%, compared to almost 65% five years earlier and a far cry from the 71% at the beginning of 1999, the year the euro was launched, according to data collected by Reuters.

“Most of the foreign exchange reserves that exist in the world today are forms of internal money, that is, they are someone’s liabilities,” Pozsar explains. “Whether you hold the sovereign debt of a country, or hold a deposit with a central bank of a foreign country, or hold deposits with Western financial institutions, these are all forms of domestic money that you don’t control. Someone owes you. And these things can be sanctioned,” he explains. To get around that, Credit Suisse expert give the example of gold. “I don’t know if it will come to that, but if things get worse, you could basically re-anchor the ruble to a bunch of gold, because you need an anchor in situations like this.”

Pozsar is not alone in his warnings about the dollar’s vulnerability, as others see the same forces at play in the fate of the currency’s reserve status. Dylan Grice, former strategist at Société Generale and founder of Calderwood Capital, describes recent moves by the US and its partners as a “weapons” use of money. “You can only play the card once,” she has written on Twitter. “China will make it a priority not to need any dollars before going after Taiwan. It is a turning point in monetary history,” she warns.

“In a cooperative game, more global trade and accumulation of foreign exchange reserves makes sense. In a competitive game, where your currency reserves are issued by an adversary and can be frozen or vaporized at that adversary’s discretion, global trade and currency reserve accumulation makes less sense,” said Spectra’s Brent Donnelly. Markets.

It is not so clear that this step will be taken at a global level Cameron Crise, strategist of Bloomberg: “It is not clear that anyone, apart from the US, has so much the ability as well as the will to ‘manufacture’ safe assets and sell them to foreigners as the foundation of a global financial system.

For years, the fate of dollar dominance has been a source of popular and contentious discussion, with repeated warnings and dire predictions of the currency’s demise. If the after the crisis of 2008 there were numerous warnings about the disappearance of the dollar, that period saw a strengthening of the greenback as the Federal Reserve took on an even more globalized role in helping rescue the world’s financial systems. It has even highlighted the problem that, although the US represented a smaller and smaller part of the world economy, the dollar itself is so important. The real risk of what happened with Russia is in ‘politics’in the real will of a series of world actors to jointly overturn the current hegemony.